MiFID II – Increased Focus on Competence

FCA Policy Statement 17/14 – MiFID II Implementation

You could be forgiven for questioning how European regulation might impact financial services organisations in the coming months and years. However, the FCA have made it very clear that firms must continue to abide by their obligations under UK law, including those derived from EU Law, and carry on with implementation plans for MiFID II and other pieces of EU financial services legislation that are due to come into effect.

Therefore, with the EU Directive coming into force on the 3rd of January 2018, there are now less than 6 months to ensure firms understand the impact of MiFID II on Knowledge and Competence and as an organisation, put robust delivery plans in place to clearly identify and close any gaps including HR Strategy, organisational design, people policy and compliance. In particular, this will have an impact on training and competence (TC) and accountability processes.

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Existing Provisions under MiFID

The Markets in Financial Instruments is the EU legislation that regulates firms who provide services to clients linked to “financial instruments” (shares, bonds, units in collective investment schemes and derivatives) and the venues where these instruments are traded.

Under the current framework, investment firms are required to ensure that their employees have the skills, knowledge and expertise necessary to discharge their responsibilities allocated to them. These MiFID requirements have been incorporated into the existing Training & Competence regime which helps to support the FCA’s consumer protection objective. The regime consists of:

 

  • A high level competent employees rule in SYSC, derived from the MiFID requirement, which requires firms to employ personnel with the skills, knowledge and expertise necessary for the discharge of the responsibilities allocated to them (including wholesale firms).
  • More detailed professionalism requirements in our Training & Competence sourcebook (TC) for certain retail activities. Including the need to attain an appropriate qualification where relevant.

Policy Statement 17/14 confirms the changes that will be implemented under MiFID II, it is wide-ranging covering conduct of business and other matters but of relevance to this white paper is the section on Knowledge & Competence requirements which relates to people risk, T&C good practice and frameworks building on RDR principles.

How does MiFID impact Knowledge & Competence Requirements?

In complying with ESMA (European Securities and Markets Authority) guidelines, the FCA are implementing changes necessary to comply but they confirm they are not going beyond what is necessary. They have therefore confirmed that they do not plan to extend the existing TC regime on appropriate qualifications to those who are not currently subject to it.

Instead the FCA gives firms flexibility in how to provide their employees with the knowledge and competence necessary to comply with the guidelines. This is very good news for organisations, ensuring that the delivery of knowledge and competence is proportionate and targeted based on the firms’ size, complexity, culture and people development strategy. This enables firms to leverage their established TC policies and procedures, using already established in-house training needs based assessment and annual assessments, continuous professional development and new product training. However, this will throw up challenges for firms with no specific experience of TC or existing expertise in this area.

The FCA has also stated that they will not introduce any new data reporting requirements to comply with these guidelines.

Key changes that you should build into your preparation and planning?

1.  Impacted firms. These will include

  • Banks
  • Investment Firms
  • Interdealer Brokers
  • Stockbrokers
  • Investment Advisers
  • Corporate Finance Firms and Venture Capital Firms
  • Investment Managers Including Individual and Collective Portfolio Managers
  • Financial Advisers
  • Local Authorities

Formal consultation is now underway about the extension of the Senior Manager and Certified Regime (SM&CR) to all the firms listed above except for local authorities.

2.  Impacted roles

The FCA have confirmed that those roles impacted will include those who give “investment information.” Giving information means directly providing information to clients (retail and professional) about financial instruments, structured deposits, investment services or ancillary services, either upon request of the client or at the initiative of the firm.

MiFID 11 Article 25 (1) introduces a requirement that firms must ensure that individuals providing advice or information to clients possess the necessary knowledge and competence to ensure that firms meet their investor protection obligations (under Articles 24 and 25).

In response to CP 16/29, firms wanted clarification on who was deemed to give “investment information” and what this would mean to individuals in firms.

In PS 17/14 18.10, the FCA confirms that the MiFID’s definition of investment advice involves the provision of a personal recommendation to a client. The definition of “giving information” in the guidelines requires an assessment of whether the staff member directly interacts with a client and whether the staff member provides services or activities listed in sections A or B of Annex 1 of MiFID II.

3.  Maximum and Minimum Timeframes to attain competence

The ESMA guidelines have introduced some concepts which are new to the UK. These include a maximum time of 4 years during which employees need to acquire knowledge and competence and a minimum time of 6 months for employees to be considered eligible to have acquired appropriate experience and can work unsupervised.

In response to a question in CP16/43 18.15, of how to define relevant experience, the FCA pointed to the guideline definition of “appropriate experience” including that “the member of staff has successfully demonstrated the ability to perform the relevant services through previous work.” They go on to advise that this work must be relevant to the role being performed.

We saw in RDR the introduction of the 30-month rule for the achievement of qualifications but this was for retail investment advisers only, so the 4 year rule will now impact this population too.

The policy statement confirms the introduction of these maximum and minimum timescales. The ESMA guidelines do not allow for grandfathering and therefore firms will need to be ready to comply from the 3rd of January, ensuring any individuals working under supervision, do so only for the maximum 4 years.

4.  Qualifications and CPD

ESMA requires employees to have both an appropriate qualification and appropriate experience. Where qualifications are not mandated by TC, the regulators aim to allow firms flexibility so that employees can achieve the required qualification through tests or training courses that meet the criteria set out by the guidelines. (It is confirmed that the review of appropriate qualifications could be undertaken by the firm or an external body).

Ensuring staff possess an appropriate qualification and maintain and update their knowledge and competence by undertaking CPD is a potentially significant problem for firms, tracking, recording and monitoring for example. However, mandating CPD aligns other roles with the demands placed on retail investment advisers and can only be a step in the right direction in terms of professionalism.

The FCA believes that their expectations in relation to qualifications and CPD are already in line with MiFID’s objectives and have confirmed that they are not extending the list of retail qualifications in TC, nor will they set out mandatory qualifications in SYSC. SYSC also offers guidance on qualifications and CPD (if not subject to TC).

They advise firms to consider the ESMA requirements so they can ensure any qualifications, training courses and tests meet the criteria.

5.  Supervision

Earlier in the paper, we confirmed the requirement for employees to work under supervision while they are working to attain an appropriate qualification and relevant experience for a maximum period of four years.

The ESMA guidelines (paragraph 20d) state that “the level and intensity of supervision should reflect the relevant qualification and experience of the staff member being supervised and this could include, where appropriate, supervision during client meetings and other forms of communication such as telephone calls and e-mails.”

The FCA confirms that they believe that existing guidance in TC and SYSC is consistent with the statement above, however the requirement that relevant individuals who supervise should hold an appropriate qualification required an amendment to the new rule in SYSC to ensure this is clear. (this brings the rule for appropriate qualifications for Supervisors in line with Article 25 (1) MiFID.

The FCA also took the opportunity to provide further details regarding its position on firms choosing to outsource Supervision to a 3rd party. They confirmed that firms must be very clear on and manage the operational risks that outsourcing can bring, ensuring due diligence on selection of a 3rd party, regular evaluations of the effectiveness of the model and of course that the firm ultimately remains fully responsible and accountable.

The Senior Manager and Certification Regime (SM & CR)

Implementation of SM&CR and SIMR is of course already in place for banks, building societies and insurers. We have now seen the FCA Consultation Papers CP17/25 and CP17/26 which describe how the regime will impact the rest of the FSMA firms and the changes being made to Accountability 1 firms. A core pillar reinforced in these CP’s is the certification regime which currently applies and will apply to “employees who could pose a risk of significant harm to the firm or any of its customers.” Firms are responsible for having processes in place to ensure such individuals hold the appropriate qualifications, have completed training (or training is underway), and have the appropriate level of competence.

The FCA says “This will help firms and us to be clear about which individuals in senior management are responsible for what aspect of a firm’s business. Greater personal accountability will focus minds and drive up standards.”

There is no direct equivalent to SM&CR in MiFID II, but MiFID allows for member states to have their own rules for their firms. The FCA do confirm however that when determining fitness and propriety that this should extend to take account of the ESMA guidelines on knowledge and competence.

Implementation of MiFID 11

The FCA propose to achieve compliance with the guidelines by amending the Training and Competence (TC) and Senior Management Arrangements, Systems and Controls (SYSC) and sourcebooks to implement Article 25 (1) of MiFID II and ESMA’s MiFID guidelines on Knowledge and Competence.

There will be no extension to the FCA list for retail qualifications as a result of the guidelines and no mandatory qualifications will be listed in SYSC. (Firms should however consider the ESMA requirements to ensure they meet the guidelines criteria – The FCA website has been updated to include this).

There will be no transitional or grandfathering arrangements (Then FCA and ESMA do not provide for these in their final guidelines).

How will these changes impact your firm?

There are many aspects of your organisation that must be considered to ensure that you are ready to comply with MiFID II (and of course SMR if you are also implementing this for the first time in 2018). The list below is not exhaustive but highlights some of the critical areas to include in your analysis and plans. (Future white papers will look at some of these in more detail).

  • HR Strategy, Policy and Processes – Whether your firm is impacted for the first time by MiFID II or already compliant with the existing regime, it will be critical to examine current people strategy in relation to recruitment, on-boarding, probation, development and line management/supervision. You may need to consider the organisational design, line manager/supervisor capability, people development and budget impacts.
  • Training & Competence Schemes – The FCA consider that their existing rules and guidelines are well placed to help firms meet the requirements but there are now more detailed Knowledge and Competence requirements for firms or entities not currently subject to the FCA TC sourcebook i.e. employees providing relevant services to clients on behalf of the investment firm. Good practice already in place in firms with staff subject to TC rules will be a good starting point, this can be made proportionate and relevant to the additional roles now impacted by MiFID II.
  • Employee Competency – Now the rules have been confirmed in PS 17/14, firms must review and expand Training & Competence frameworks/Schemes to define and measure Competencies and KPIs across a wider role base. You will need to decide how to implement appropriate controls e.g. authorisations to include all roles now in scope and ensure people understand what they can and cannot do. You need to consider how the new rules in relation to minimum and maximum timeframes to attain competence impact staff currently under supervision, ensuring compliance with the new rules in January. MI and Reporting now needs to extend across the organisation including; managing and adhering to Conduct rules including breaches, annual assessment of Knowledge and Skills and Declaration of competence, regular compliance monitoring, Board Reporting; Fitness & Propriety and Certification.
  • Supervision – With the expansion of the rules to now include those roles that provide investment information, there will be a requirement for more structured supervision of a far wider population across the firm. Will this mean additional resource or expanding the remit of line managers? Whatever the answer, firms will need to consider line manager/supervisor capability, experience and now qualifications as well as how this might impact the organisational framework, hierarchies and spans of control.
  • People Development – We welcome confirmation that the FCA is taking a pragmatic view to how firms can comply with the extended guidelines and how these can be met in such a way that benefits the colleague, the customer and organisation. It ensures that your learning strategy and people development plans can be reviewed and enhanced to meet the MiFID II requirements while ensuring that your investment delivers true growth in organisational capability and enhanced customer outcomes. Your revised training and development needs analysis and plans should include decisions on appropriate qualifications, whether internal or external and how these will be delivered and tracked and be checked against the ESMA guidelines criteria. This will be integral to the overall training needs analysis across the organisation including induction, role development, talent management and CPD.
  • Budget – All of this will have an impact on cost and budget allocation. Many firms have to date focused on some of the apparently more challenging aspects of MiFID II, however with policy now clear and less than 6 months away, firms cannot ignore the impact of the changes described in this paper on; people capability, organisational design, learning and development, resources, systems and additional compliance costs.
  • Risk Management – The impacts are broad ranging. It is not just about MiFID II rules but also how these interact with other regulation such as SM&CR, SYSC and TC. There are connections and dependencies in amongst these which if not properly identified and managed will increase risk of non-compliance and potential consumer detriment.
  • Accountability and conduct – The impact on Fitness & Propriety, Conduct Rules and Certification are now confirmed under MiFID II. This in turn has a major impact on Senior Manager responsibility and accountability, for example, in the fulfilment of prescribed responsibilities relating to the Certified regime and the firms culture. Senior managers must therefore take a keen interest in the implementation and BAU plans for MiFID II Knowledge and Competence as well as all other aspects of the regulation.
  • Administration, governance and controls – The scale and widening of those roles now in scope and in firms will test even the most efficient of manual processes. The value of accurate and timely MI and reporting will grow in significance. Firms must explore the benefits provided by systemising management through people risk and T&C management software platforms. Trailight will help you with that.

What needs to happen next?

Assuming your firm is in scope for MiFID II, it is now up to you and your firm to implement the requirements under Knowledge and Competence ready for compliance from 3 January 2018.
Trailight can help, please contact us:

Tel +44 (0)1904 206 066

Email enquiries@trailight.co.uk

Final Reflections

Some might say that the FCA have missed an opportunity to make use of and strengthen existing TC rules and guidance. After all, these set out principles and procedures already in place in many firms to manage the competence of existing staff in scope and which could be expanded and applied to help tackle the MiFID II challenges.

So, is the regulator taking its eye off the competence ball? Far from it. The accountability regimes (SM&CR) make it abundantly clear that fitness and propriety, competence and capability and good conduct are non-negotiable outcomes. Bearing in mind the move to “Certification”, which encompasses formerly regulator pre-approved staff and much wider populations in firms, the FCA is saying that the firm itself effectively becomes a mini -regulator, responsible for determining competence prior to Certification with a resulting role to play in protecting markets and consumers. Notwithstanding that, ongoing continued responsibility for delivering and maintaining high standards of competence and behaviour and not least…with senior managers responsible and accountable for all of that.

It perhaps does then make sense to use the new regimes to drive the outcomes rather than adapt the current TC. Food for thought for the senior managers in firms who hold or will hold the Prescribed Responsibilities that relate to the firm’s performance of its obligations under the senior management regime and the certification regime.

Further reading:
FCA PS 17-14 – https://www.fca.org.uk/publications/policy-statements/ps17-14-mifid-ii-implementation
FCA CP 16-29 – https://www.fca.org.uk/publications/consultation-papers/cp16-29-mifid-ii-implementation
ESMA Guidelines – https://www.esma.europa.eu/sites/default/files/library/2015-1886_-_final_report_on_guidelines_for_the_assessment_of_knowledge_and_competence.pdf